As is the case every year many topics involving the global economy were discussed at the Davos summit of the World Economic Forum. This year, a focus on the acceleration of developed market gross domestic product (GDP) and its impact on emerging market economic growth were presented.
However, one of the concerning topics from a South African perspective was the session on “Brics in Mid-life Crisis”. An interesting development from the Davos deliberations is the fact that six sessions were devoted to Africa.
The African continent is recognised as one of the last frontier markets, consequently its potential as a foreign investment destination is being given serious consideration by both the developed and emerging markets.
From a South African perspective how do these developments affect the South African economy? On the positive side, an accelerating global growth outlook could be mildly supportive of commodity prices. Given the weak rand, any increase in dollar commodity prices would increase revenues from the mining sector and help reduce the current account deficit.
Additionally, acceleration in the developed world, especially the UK and Europe, would benefit exports through the demand for manufactured products, especially in the vehicle manufacturing sector.
Sub-Sahara African economies have, in general, achieved GDP growth rates of about 6 percent.
It is forecast that these growth rates can be maintained for the foreseeable future. Over time this growth will largely be driven through increasing infrastructure and consumption expenditure.
The South African construction firms would be especially well placed to benefit from this trend as it unfolds. In addition, our food and clothing retailers are slowly but surely expanding into Africa.
Economic challenges
The Davos discussion on “Brics in Mid-life Crisis” illustrates that South Africa faces certain economic challenges. Some of the factors hindering the potential growth of the local economy are: commodity prices, labour policies, electricity, rail infrastructure and the lack of a technologically advanced manufacturing sector.
The Ashburton Investments forecast for global GDP growth is for acceleration from 2.9 percent last year to 3.5 percent this year. Despite the forecast increase in global GDP, it is our view that for commodity demand to accelerate meaningfully, global growth rates of between 4.5 percent and 6 percent are required.
Thus questions are being raised, that if there is no bull market in commodity prices, are the Brics economies of Brazil, Russia, India, China and South Africa a preferred investment destination?
Added to South Africa’s challenges, the country currently suffers from the inadequate generation of electricity to sustain a growing economy.
At present, the reserve margin is low and some commentators fear rolling blackouts in winter. This lack of increased electricity supply places a ceiling on economic growth. However, the Medupi power station is scheduled to come into partial production towards the end of the year.
This development would alleviate the current supply shortage. Labour policies in South Africa are, in a developed market context, restrictive and many companies are reluctant to hire staff, placing a brake on potential growth. Moreover, the lack of a rapid and efficient rail network is also a barrier to potential growth. Currently, coal and iron ore exports are constrained by insufficient rail capacity. The lack of a “hi-tech” manufacturing sector in South Africa primed to take advantage of the global demand for television sets, tablets, computers and smartphones is also a deterrent to potential growth.
Finally, the government has produced a well-considered economic blueprint termed the National Development Plan.
To achieve success the plan requires the buy-in and implementation by all stakeholders, which include the government and the private and public sectors.
Should this buy-in be realised, then the country may achieve higher levels of growth and join its sub-Saharan African neighbours who are attaining growth rates of about 6 percent.
* Paolo Senatore is the chief investment officer for South Africa at Ashburton Investments.